EBITDA (earnings before interest, taxes, depreciation and amortisation)
EBITDA explained: what it means, how to calculate it, a peso example, and how to read your EBITDA margin.
Published Monday 17 August 2026
Table of contents
Key takeaways
- EBITDA stands for earnings before interest, taxes, depreciation and amortisation, and measures your operating profitability before non-cash expenses and financing costs.
- Lenders, investors and potential buyers use EBITDA to compare businesses and calculate valuations using EBITDA multiples.
- EBITDA margin shows what percentage of revenue remains as operating profit before non-cash charges, helping you benchmark performance against similar businesses.
- EBITDA has limits: it doesn't reflect cash flow, ignores capital spending and lacks a standardised calculation method.
EBITDA (definition)
EBITDA is a measure of your business's operating profitability before accounting for interest, taxes, depreciation and amortisation. It shows how much your core operations generate, making it easier to compare performance across companies with different capital structures or tax situations.
- Earnings: the profit your business generates from its operations
- Interest: the cost of borrowing, such as loan or credit line payments
- Taxes: income tax obligations owed to the government
- Depreciation: the gradual reduction in value of physical assets like equipment or vehicles
- Amortisation: the gradual reduction in value of intangible assets like patents or software licences
Why EBITDA matters
EBITDA gives you a clearer view of your operational performance by stripping out financing decisions, tax obligations and accounting write-offs. This makes it useful when you want to see how well your day-to-day operations are performing.
Because it removes non-operating factors, EBITDA lets lenders, investors and potential buyers compare businesses on a like-for-like basis. Two companies with different debt levels or asset bases can be evaluated using the same yardstick.
When to use EBITDA
EBITDA is most useful when others need to assess your business's earning power. Here are four common scenarios where EBITDA comes into play:
- Applying for a loan: lenders often look at EBITDA to gauge whether your operating income can cover debt repayments.
- Seeking investors: potential investors use EBITDA to compare your profitability against other opportunities without being distracted by capital structure differences.
- Preparing for a sale: business valuations often apply EBITDA multiples, where buyers multiply your EBITDA by an industry-specific figure to estimate your company's worth.
- Benchmarking: comparing your EBITDA against similar businesses helps you spot strengths and areas that need improvement.
EBITDA vs net profit
EBITDA and net profit measure profitability differently. EBITDA focuses on operating performance before financing and non-cash costs, while net profit shows what remains after all expenses.
Net profit is the amount left over after subtracting every expense, including interest, taxes, depreciation and amortisation. EBITDA deliberately excludes those four items to isolate how well your core operations perform. Use net profit to see your true bottom line; use EBITDA to compare operational efficiency.
EBITDA vs EBIT and operating profit
EBITDA, EBIT and operating profit are related but distinct measures. Understanding the differences helps you choose the right metric for your analysis.
- EBITDA: earnings before interest, taxes, depreciation and amortisation. It excludes all non-cash charges and financing costs.
- EBIT: earnings before interest and taxes. It includes depreciation and amortisation, so it accounts for the cost of using physical and intangible assets.
- Operating profit: often used interchangeably with EBIT, though some businesses calculate it slightly differently depending on what they include as operating expenses.
EBITDA is higher than EBIT because it adds back depreciation and amortisation. Choose EBITDA when you want to ignore asset-related write-offs; choose EBIT when asset costs matter to your analysis.
How to calculate EBITDA
You can calculate EBITDA using two formulas, depending on which figures you have available. Both produce the same result.
Formula 1 (from net profit):
Net profit + interest + taxes + depreciation + amortisation = EBITDA
Formula 2 (from operating profit):
Operating profit + depreciation + amortisation = EBITDA
Example EBITDA calculation
Here's a worked example using Philippine pesos. Suppose your business has the following figures for the year:
- Net profit: ₱300,000
- Interest: ₱50,000
- Taxes: ₱100,000
- Depreciation: ₱80,000
- Amortisation: ₱20,000
Using the first formula:
₱300,000 + ₱50,000 + ₱100,000 + ₱80,000 + ₱20,000 = ₱550,000
Your EBITDA is ₱550,000. This figure represents your operating earnings before accounting for borrowing costs, tax obligations and asset write-offs.
EBITDA margin
EBITDA margin measures what percentage of your revenue remains as EBITDA. It's calculated by dividing EBITDA by total revenue and expressing the result as a percentage.
Formula:
EBITDA ÷ revenue × 100 = EBITDA margin (%)
For example, if your EBITDA is ₱550,000 and your revenue is ₱2,000,000:
₱550,000 ÷ ₱2,000,000 × 100 = 27.5%
A higher EBITDA margin generally indicates stronger operational efficiency. What counts as "good" varies by industry, so compare your margin against similar businesses rather than relying on a universal benchmark.
What EBITDA doesn't tell you
EBITDA is useful, but it has limitations you should keep in mind. Relying on EBITDA alone can give you an incomplete picture of your business's financial health.
- It hides debt: because EBITDA excludes interest, it doesn't reveal how much of your earnings go toward servicing loans.
- It ignores capital spending: EBITDA doesn't account for the cash you spend on equipment, vehicles or other assets needed to run your business.
- It lacks standardisation: there's no single official method for calculating EBITDA, so figures can vary depending on what a business chooses to include or exclude.
- It's not the same as cash flow: EBITDA doesn't reflect actual cash coming in and going out, since it ignores changes in working capital and capital expenditures.
You may also encounter "adjusted EBITDA," which adds back one-off or non-recurring items (such as restructuring costs or legal settlements) to show a more normalised operating performance.
Track EBITDA with Xero
Keeping track of the figures you need to calculate EBITDA is easier when your financial data is organised in one place. Xero's accounting software gives you real-time access to your income, expenses and reports, so you can monitor profitability and spot trends as they happen. Ready to simplify your finances? Get one month free and see how Xero can help you stay on top of your numbers.
FAQs on EBITDA
Here are answers to common questions about EBITDA and how it applies to your business.
What does your EBITDA tell you?
Your EBITDA tells you how much profit your core operations generate before financing, taxes and non-cash expenses. It helps you assess operational strength independently of your capital structure.
What is a good EBITDA margin?
A "good" EBITDA margin depends on your industry. Compare your margin to similar businesses rather than aiming for a fixed percentage, since margins vary widely across sectors.
What is an EBITDA multiple?
An EBITDA multiple is a valuation ratio that compares a company's total value to its EBITDA. Buyers and investors use it to estimate what a business is worth based on its operating earnings.
Is EBITDA the same as gross profit?
No. Gross profit is revenue minus the direct cost of goods sold, while EBITDA also subtracts your operating expenses (other than depreciation and amortisation). The two measure profitability at different stages.
Does EBITDA include owner salary?
Yes. If you pay yourself a salary, that amount is treated as an operating expense and is already subtracted before arriving at EBITDA.
Related terms
Learn more about EBITDA
Handy resources
Advisor directory
You can search for experts in our advisor directory
Try Xero for free
Xero provides the clear business data you need to measure your EBITDA precisely
Xero small business guides
Discover resources to help you do better business
Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.